James Stafford: Several weeks ago American mainstream media headlines were awash with sensational news that the US had lifted the ban on crude oil exports, but in the fine print beneath the headlines this news was really just about a loophole for processed condensates. How significant is this 'loophole' for the future of US oil exports?
Michael Levi: I don't even know that it's a loophole. There has long been a general belief that processed condensates can be exported under existing law. The wrinkle in this case is that the processing is very much minimal, and the administration confirmed that it still met the requirements for export. I mean there's a broad view in the policy community that when push comes to shove even unprocessed condensates are likely to be allowed to be exported.
James Stafford: Is it a question more of when the ban will be lifted, rather than if?
Michael Levi: I don't have a particular time scale on that. I don't see a lot of appetite in the administration for blocking exports on policy grounds. I think that this is politically tricky territory, but to the extent that the administration can allow a rational organization of energy markets, I don't see a lot of appetite for going out of their way to avoid that.
By the way, the initial headlines were flat out wrong, which spurred a lot of the confusion. There also was a sense out there that this was a first step to a much broader relaxation. I actually read it in a very different way. This was not a particularly politically risky step to take... so it doesn't give much of an indication of what the administration's political appetite is for more difficult steps. To the extent the administration can take some of the pressure off the system by allowing condensate and condensate-like exports, it actually lowers the need to make more significant reforms.
James Stafford: What would this then mean for domestic oil prices?
Michael Levi: Because this sort of export was generally anticipated, I don't expect a significant impact on domestic oil prices as a result. If there was a full out lifting of the ban on crude oil exports I think you'd see some rise in domestic oil prices a few years out.
You would expect a complete removal of the oil export ban to have a larger impact on domestic prices than on international prices. That's sort of a logical implication of the fact that the domestic market's smaller than the international market.
James Stafford: At the same time as this loophole was announced to great fanfare, you noted that another, much quieter LNG deal between BP and China's CNOOC was "at least as important as the U.S. move." What is so significant about the BP-CNOOC deal, and what does it mean for the LNG market?
Michael Levi: There's a general belief even among a lot of people who watch the LNG markets closely that China has no involvement in exports of US natural gas. It's certainly true that no Chinese company has signed a contract with an operator of a US LNG terminal.
But, I was struck during a visit to China last month to hear people describe what they thought as upcoming exports of US natural gas to China. What they identified were situations where traders who had contracts with US LNG exporters had, in turn, other contracts to sell their gas on to CNOOC. The indicator in these situations was that the contracts they signed, first with BG and now with BP, have prices for delivered gas that are partially indexed to natural gas rather than to oil.
Without seeing the contracts, no one knows whether this is linked to physical flows as well. But at a minimum, it means that the emergence of the United States as an LNG exporter has created an opportunity for buyers, including buyers in China, to diversify some of their price risks that are traditionally being associated with LNG imports.
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